Opportunities and Risk Management System

Against the backdrop of the current economic downturn and the turbulence in the financial markets, our risk management has proven to be most efficient and has underscored the key role it plays in our operations.

Taking account of the opportunities and risks, we comment on the medium-term development in business conditions and their impact on our company in the section on ”Significant Events after the Reporting Date and Forecast” on page 146.

Business activity as defined by the Articles of Incorporation makes risk-taking unavoidable in many instances, as this is frequently a precondition for exploiting opportunities. All risks must, however, be contained and controllable by the management of the company. For our Group, foresighted and effective risk management is therefore an important and value-creating component of management which is geared towards safeguarding the entire company as a going concern, along with capital invested and jobs.

We treat risk and opportunity management separately as a matter of principle. A separate reporting system maps, tracks and supports the monitoring of risks. By contrast, the recording and communication of opportunities forms an integral part of the well-established management and controlling system that operates between our subsidiaries and associated companies and the holding company. Identification, analysis and the implementation of operational opportunities is incumbent on the management of the individual companies. Goal-oriented measures are devised to reinforce our strengths and to tap strategic growth potential in cooperation with the holding of the Group. To this end, the Group has a series of instruments at its disposal which are described in the section entitled ”Management and Control Instruments” on page 57.

Risk management incorporates all fully consolidated companies in the Steel, Trading and Services divisions and also includes a number of non-consolidated companies. Alongside the fully consolidated companies combined under the Tubes Division, jointly held EUROPIPE GmbH (EP), including MÜLHEIM PIPECOATINGS GmbH (MPC), has been integrated in accordance with Salzgitter AG’s guidelines. In the current financial year, RSE Grundbesitz und Beteiligungs-Aktiengesellschaft (RSE), a company of the Technology Division, was also included.

We fulfill our risk management duties in respect of the listed company Klöckner-Werke AG (KWAG) as part of the control functions exercised by the Supervisory Board of KWAG. KWAG’s Supervisory Board has set up an Audit Committee on which Salzgitter AG is represented. One of the core tasks of the Audit Committee is to monitor risk management and material risks. The committee meets regularly.

Our subsidiaries and associated companies apply the risk management system autonomously. It is the task of the management holding company to provide guidelines that constitute the basis on which adequate and uniform consideration and communication of risks can be ensured within the Group. We convey our understanding of risk management through a risk manual and risk guidelines distributed to the companies. These documents lay down the principles through which we harmonize groupwide risk inventories and ensure the informative value for the Group. As has been our practice up until now, we will meet the challenge of developing our risk management system on an ongoing basis in line with requirements in the future as well.

We include risks as an integral part of our intra-year forecasting, medium-term planning and strategy discussions. With the aim of avoiding potential risks, controlling, managing, mastering them and taking the relevant preventive measures, we have defined a set of different procedures, rules, regulations and tools. As a result of the high degree of transparency achieved in respect of developments which involve risk, we are able to take appropriate countermeasures and implement them at an early stage.

At Salzgitter AG there is a clear demarcation between risk management and controlling which are nonetheless geared towards complementing each other. Actual risks can therefore be handled either through the medium of controlling (for example, by way of provisioning), or through the risk management system (by taking action to overcome the risk), or by using both approaches, each augmenting the other.

Our reporting system used by the entire Group ensures that management is provided with pertinent information. Group companies report on the risk situation in monthly controlling reports or ad hoc directly to the Executive Board. Almost all companies subject to reporting requirements use the Group database, which was developed particularly for this purpose. We analyze and assess the risks at Group level, monitor them punctiliously, allocate them to risk categories and align them to our overall business situation.

For its part, the Executive Board reports to the Supervisory Board on the risk position of the Group as well as – where appropriate – on the status and details of individual risks. The Supervisory Board has formed an Audit Committee that is tasked with addressing issues relating to risk management in its regular meetings.

A distinction is drawn between improbable and probable risks determined by the likelihood of their occurrence. Improbable risks are events that, after careful commercial, technical and legal consideration of the circumstances, are deemed unlikely to occur. The conditions that must be fulfilled for this judgment to stand are documented, periodically examined and updated if necessary. It is the task of controlling and internal auditing at Salzgitter AG to monitor observance of the criteria established. The definition of probable risk means that loss or damage to the company resulting from undesirable event can no longer be ruled out. We document the quantitative extent of the calculated loss or damage in the light of all influencing factors in order to track and assess the risks.

In the derivation of net loss from gross loss we take account of all measures to contain loss. Provisions and valuation allowances are handled by our controlling, and the gross loss is reduced accordingly, a measure to which we make specific reference in our risk documentation.

With regard to the extent of loss or damage, we distinguish between major risks in excess of a gross amount of at least € 25 million and other risks involving loss or damage of less than a gross amount of € 25 million.

Risks are recorded in the internal planning and controlling system of the respective companies and communicated to Group management in accordance with the specific company reporting thresholds.

It is evident that, even if a number of major risks of € 25 million each were to occur at the same time, the Group would not be endangered as a going concern.